The banking system receives a new cash deposit of $250,000.Total deposits eventually rise by $1 million.The value of the reserve ratio is

Question

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Since the banking system received a new deposit of $250,000 and total deposits eventually rise by $1 million, the banks have the potential to lend out $750,000 (($1 million - $250,000) = $750,000).

The reserve ratio is the portion of deposits that banks must keep on hand as reserves, and it is expressed as a decimal.

To find the reserve ratio, we divide the required reserves by the total deposits:

Required Reserves = Reserve Ratio x Total Deposits

We know that the banks have the potential to lend out $750,000, so the required reserves will be:

Required Reserves = Reserve Ratio x $1,000,000

We can rearrange this equation to solve for the reserve ratio:

Reserve Ratio = Required Reserves / Total Deposits

Reserve Ratio = ($250,000) / ($1,000,000)

Reserve Ratio = 0.25 or 25%

Therefore, the correct answer is D) 0.25.

The Banking System Receives a New Cash Deposit of $250,000